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I've recently completed my review of what most advisors have not yet seen: a product with an increasing income rider. In fact, while most FIA guaranteed income benefit (GIB) riders will provide a "level" income once activated, it will not increase once started.

"Level" FIA GIB riders

If a 60-year-old client funded $500,000 into my favorite FIA with a 5 percent bonus, and let it accumulate at a guaranteed 7 percent rate of return in the accumulation account, the account value at age 70 would be $1,032,754.

If this client activated the GIB rider at age 70, the annual income benefit for life would be $61,965 (6 percent x $1,032,754). If the client lived until age 89 years old, the total income received would be $1,239,300, which is great.

"Increasing" income rider

I've recently completed my review of what most advisors have not yet seen -- a product with an increasing income rider. Let me just tell you how this product works, because it is quite a bit different than level income products in the marketplace.
1) The guarantee is the highest of 4 percent or whatever the FIA product actually credits each year. Every year, the insurance company determines with what the actual account value is credited. If that amount is more than 4 percent, that amount will be credited to the guaranteed roll up/accumulation account, which is used to calculate the GIB.

2) When the income phase is started, the annuity owner will start with a base income payment just like a level payment product; however, every year that the actual account value in the FIA is credited with a positive return, the income payment will increase by the same percentage return.
For example, if the income stream starts at $61,965 (the same as the level product example) and in year two the actual index was credited with a 5 percent return, the next year's income benefit from this product would be $61,965 x 5 percent = $3,098 + $61,965 = $65,063.

Once the income payment increases (which it can do in every year), the payment will never go backwards.

The numbers

The following chart illustrates the power of the increasing income FIA versus a level income product. I assumed what I believe is a real world variable return each year to drive the numbers in the following chart. I will not explain the numbers due to space issue, but you can contact me via the forum below for more details.

Age

GIBIncreasing Income

GIBLevel income

70

$60,148

$61,965

71

$60,148

$61,965

72

$65,562

$61,965

73

$70,807

$61,965

74

$70,807

$61,965

75

$75,763

$61,965

76

$81,824

$61,965

77

$86,734

$61,965

78

$86,734

$61,965

79

$94,540

$61,965

80

$102,103

$61,965

81

$102,103

$61,965

82

$111,292

$61,965

83

$120,196

$61,965

84

$120,196

$61,965

85

$128,609

$61,965

86

$138,898

$61,965

87

$147,232

$61,965

88

$147,232

$61,965

89

$160,483

$61,965

Total Income

$2,031,411

$1,239,300

If you are selling FIAs, and specifically FIAs with a GIB rider, you must learn this product. Besides that, it may be a good fit for many clients from an E&O avoidance point of view; I think you should be offering this product.

The biggest problem with this product is to fully understand how it works. While I've made it sound terrific in this article, it is not a good fit for everyone. There are products that are a better fit for some clients depending on their circumstances and goals.

Illustrating the return of an increasing income product

It's really difficult to illustrate this product. Unlike level guaranteed return products (such as 7 percent a year), this product will return higher of 4 percent or whatever the actual account value in the FIA is credited with every year. That could be a number slightly more than 4 percent, or it could be much higher, say 7 percent to 8 percent.

The income phase is also difficult to show the client what their "guaranteed" income will be, because we don't know what the actual positive returns will be in the future.

In order to sell this very powerful product, what you really need is a calculator that allows you to input a hypothetical variable rate of return both for the accumulation period and during the payment phase.

If you'd like to learn how to use my calculator for free, please contact me using the forum below.

*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.

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